Upon completion of this section, you should be able to:
Legal liability is the liability imposed upon a person by law when he/she fails to perform obligations satisfactorily or injures someone. This action is termed a legal wrong. There are three broad classes of legal wrongs: tort, crime and breach of contract. Every legal wrong is an unjustified invasion of a legal right for which there must exist at least one legal remedy. A legal right is one which is recognized under law to exist. Legal remedies are the means by which violated rights are compensated.
Criminal law deals with wrongful acts against society itself. All of us, as citizens of our society, have a right to live in peace and good order. Some form of punishment such as imprisonment and/or monetary fines usually remedies an unlawful invasion of the social order.
Contract law supports the basis by which most of our economic transactions are regulated. Each party to a contract has a legal right to have every other contracting party fulfill its contractual promises. Legal wrongs in contract law occur when one part fails to perform as required. Legal wrongs in contractual dealings can also occur when one of the contracting parties was coerced into making non-voluntary contractual promises or when mistakes or misunderstandings relative to performance occur. The remedies for contractual wrongs include the judicial remedies of money damages, specific performance and rescission and restitution.
Generally speaking, neither criminal law nor contract law are a subject of liability insurance, while tort law is.
A tort is a civil wrong, an injury to one part caused by some act or omission of another party. It can arise from a violation of common or statutory law. It is a private wrong as opposed to a public wrong or crime. Therefore, it is remedied by suit brought in a civil court and not by a criminal proceeding.
Historical Development of Tort Law
Torts have their origin in common law which is based upon the principle of "stare decisis" (Latin for "the decision stands"). Current court decisions are based on past decisions to the extent that the circumstances are the same. Courts may reverse or modify existing decisions because they are no longer relevant or applicable. Over time, statute law has been introduced which has modified the common law past decisions. Whenever there is conflict between statute law and common law, statute law will always take precedence.
Types of Torts
Torts can be divided into three categories:
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Elements of a Tort
There are four elements which must be satisfied in order to conclude a successful tort action:
Negligence is the failure to use at least the degree of care which a reasonable person, in the same position as the tortfeasor (or the party responsible for the act), would exercise to avoid exposing others to an unacceptably high probability that one of their legally protected rights will be invaded. The standard of care is relative to the circumstances and will vary accordingly. While the scope of duty is reasonable care, courts have defined differing degrees of care, which are reasonable in particular situations. Courts will hold the negligent tortfeasor responsible only for losses which the courts deem to be reasonably foreseeable by a reasonable man acting in prudent manner. In any event, entities are never privileged to act negligently towards one another. In determining liability, the courts may also examine the relative fault of the victim.
While the standards of care required may seem to be rather vague, there are some standards of care which have been specifically defined.
Liability insurance protects an insured against financial losses which arise from their obligations to others by transferring that financial loss to an insurance company.
Liability can arise out of the ownership of property, from manufacturing or contracting operations, or from providing a professional service. The damages for which insureds may be liable may arise as a result of negligence which may be their own or the negligence of someone for whose actions they have responsibility. Damages could also come from a breach of contract or the assumption of the liability of others.
Since the possibilities of liability are numerous, the number and variety of liability insurance contracts are large. While it is widely known that coverage for automobile liability and liability under workers' compensation acts are treated separately, so too are there many different specific liability contracts available, including the following:
In addition to the many types of liability policies available to handle specific loss exposures, there are also several sources of insurance contracts. Some are standard while others are non-standard in nature.
Standard forms are sometimes referred to as bureau forms because their provisions are drafted by organizations such as the Insurance Services Office (ISO) and are recommended for use by insurers which are members or subscribers to the organization. They are standard in that the language of the policy provisions is the same regardless of insurer. A number of advantages are derived from standard forms and provisions by insurers, regulators and policyholders, including:
General liability is one of many lines of insurance within the scope of Insurance Services Office. ISO is a nationwide organization that functions as an advisory and rating organization much as the National Council on Compensation Insurance functions for Workers' Compensation.
ISO provides a wide range of services, including the following major functions: collect insurance statistics; classify and process statistical data; perform actuarial research; make advisory rates for affiliates; act as an agency for filing forms, rates and rules with state insurance departments; publish and distribute manuals, rules and rates; act in an advisory capacity to independent state rating bureaus; create and apply property rating schedules; and develop standard forms of policies and coverages.
Any insurer can become a member or subscriber for any line of insurance handled by ISO. Varying degrees of affiliation and purchase agreements are also available. ISO's professional staff is guided by a hierarchy of committees made up of their subscribers in developing new forms, coverages and services.
Most of the general liability policies that a premium auditor becomes involved with are the standard forms developed by ISO.
For a number of years, Insurance Services Office (ISO) worked on a project that was meant to simplify and modernize the commercial lines policies. It became effective in many areas on January 1, 1986. This project brought about changes to standardize the format and content of policies. Most importantly, it met the insurance industry's request of being adaptable to current and future automation technology.
The package concept developed is known as the Commercial Package Policy (CPP). The CPP uses the same forms for monoline and multiline policies.
With the CPP program, all the forms and endorsements for a particular line of insurance make up the coverage part. If a policy provides only a single coverage part, it is a monoline policy. On the other hand, a policy with more than one coverage part is a Commercial Package Policy. The contents of a monoline policy differ from those of a package policy only in the number of coverage parts included.
The contents of the Commercial Package Policy includes the following basic items:
1. Common Policy Conditions
The General Liability coverage part offered by ISO has gone through extensive changes, including the name of the policy. Effective 1/1/86, the policy became known as the Commercial General Liability (CGL) Coverage part, from the Comprehensive General Liability (CGL) policy. Same initials, different coverages.
The Commercial General Liability coverage part agrees to "pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." Common Package Policy (CPP) = Common Policy Conditions + Common Declarations + Coverage Parts
(1) Commercial Property (includes glass)
(2) Commercial General Liability
(4) Inland Marine
(5) Boiler & Machinery
The policy is designed to provide a broad base of liability protection for the insured. The main coverages provided under the CGL are:
1. Premises/Operations Liability
This coverage provides protection from exposures arising from the ownership, maintenance or use of property and from operations in progress.
A person or firm owning land or a building owes other certain common-law duties for the safety of others. Similarly, a party conducting a business operation has a duty to conduct the operations with reasonable care to avoid injuring others or damaging their property.
2. Products/Completed Operations Liability
This coverage provides protection from claims arising from the products hazard or completed operations hazard.
The products hazard occurs when the insured sells a product to others and bodily injury or property damage results from the use of that product by others. Coverage only applies if control of the product is relinquished by the insured and the accident happens away from the insured's premises.
The completed operations hazard, similarly, refers to bodily injury or property damage that occurs after the insured's operations have been completed. This hazard includes those situations in which the insured renders a service, such as a contractor. It generally would not include an insured in the business of manufacturing, selling or distributing goods. A servicing business may require both completed operations and products coverage if they both sell an item and install or service it for a customer.
3. Contractual Liability
Contractual liability arises out of the assumption of another person's or entity's legal responsibility.
The coverage is provided for all insured contracts which includes leases of premises, sidetrack agreements, easement agreements, elevator maintenance agreements and all contracts assuming tort liability.
4. Personal and Advertising Injury
Personal injury covers losses resulting from injury to others from libel, slander, false arrest, etc. Advertising liability refers to injuries resulting from advertising activities of a firm not in the advertising business.
5. Medical Payments
Medical Payments coverage provides coverage for medical expenses of persons injured on the insured's premises without regard to the insured's negligence.
6. Fire Damage Legal Liability
7. Broad Form Property Damage
8. Host Liquor Liability
9. Non-Owned Watercraft
10. Limited Worldwide Liability
11. Additional Persons Insured
12. Extended Bodily Injury
13. Automatic Coverage For Newly Acquired Organizations
14. Owner's and Contractor's Protective
15. Incidental Medical Malpractice
While the coverage part was designed to be broad in scope, it was not intended to provide insurance for:
Watercraft LiabilityThese special areas of liability coverage require individual policies and underwriting, and therefore, are not included under the CGL coverage part.
The Commercial General Liability Coverage Part is designed for general use countrywide. In most cases, there is no need for modification. However, because of the complex needs of some insureds, modifications to these basic coverages must be made.
An endorsement is nothing more than a written modification of some portion of the policy. Some endorsements are used to broaden coverage while others are used to limit coverage. Still, other endorsements are used to meet specific state regulatory requirements.
The most commonly used endorsements are:
The miscellaneous liability coverages offered by ISO were revised to track with the 1986 revision to the Commercial General Liability policies. These coverages include: Owners' and Contractors Protective, Principal's Protective Liability, Railroad Protective Liability and Liquor Liability.
Owners' and Contractors' Protective Coverage Part
As a general rule, it may be said that a person is not only responsible for his/her own conduct but also for the conduct of others when they act in his/her behalf with his/her consent. This is another way of saying that an employer is responsible for the acts of his/her servants or a principal for the acts of his/her agent. There is a distinction between an employee and an independent contractor.
The discussion above deals with the liability exposures of owners and contractors engaged in construction operations who may become liable for acts of independent contractors. Another type of liability exposure could arise from other types of independent contractors such as newspaper publishers. While principals generally are not held responsible for the acts committed by others, such as agents or independent contractors, there are enough exceptions to make it uncertain. There is a need for protection when there is control over another's actions.
Principal's Protective Liability insurance provides a two-part coverage. The first coverage part is designed to protect a principal in the event an independent contractor claims an injury while working for the principal. The second coverage part is intended to protect the principal against his or her liability from the injury or damage of an independent contractor while working for the principal.
Railroads traditionally have looked for protection from liability claims from the public and from obligations involving the railroad's employees and its own rolling stock form contractors doing work which involves railroad right-of-way (highway or bridge construction are common examples). Normally, if this protection is not given, the railroads do not grant the easement rights necessary for the construction near the railroad to begin.
Railroad Protective Liability insurance can meet the railroad's needs. The insurance is obtained for or by the railroad but paid for by the contractor. The policy names the railroad as the named insured and it covers the railroad against bodily injury and property damage losses sustained by almost anyone at the designated work site. The insurance also provides first-party coverage for all physical damage to the rolling stock of railroads as well as their contracts and equipment.
The basis of premium is the total cost of all work let or sublet in connection with each specific project. The rates for this coverage apply per $1,000 of Total Cost.
The Commercial General Liability policy specifically excludes liquor liability for those organizations in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages. Firms not in a liquor-related business are covered for this exposure by the CGL policy while those in the liquor business must purchase a separate policy or have their Geneal Liability policy endorsed for liquor liability coverage.
The liability to a firm in a business involving alcoholic beverages stems from its selling, serving or giving such beverages:
The Commercial Lines Manual (CLM) is the fundamental reference used in classifying and rating general liability policies. The CLM is published by the Insurance Services Office, Inc., a national advisory and rating organization licensed in all 50 states. It is comprised of five basic parts: common general rules, classification table, lines of insurance divisions, countrywide rate pages and state rate pages.
1. Common General Rules: These are common rules for all lines of insurance within the scope of the manual. ("CG" pages)
2. Classification Table: This section provides the classification terminology and code numbers for various operations. ("CS" pages)
3. Lines of Insurance Divisions:
Div. 1 - Auto
Div. 2 - Boiler & Mach.
Div. 3 - Crime
Div. 4 - Farm
Div. 5 - Fire
Div. 6 - Genl. Liability
Div. 7 - Glass
Div. 8 - Inland Marine
Div. 9 - Multiple Lines
4. Countrywide Rate Pages: Provide rating information that applies countrywide, rather than on a "per-state" basis.
5. State Rate Pages: Provide rates for each classification by defined territories.
Common Policy Declarations
The Common Policy Declarations is used to form a part of the policy jacket of the Commercial Package Policy (CPP). The CPP is used when more than one coverage part is being provided. The overall limit of this form is to reduce the redundant information from the Coverage Declarations and to summarize coverages and package premiums.
The items covered by this form are:
1. Policy Number - The policy number is assigned by the company. The same number is used on all the coverage parts.
2. Names Insured - The insured named here is considered the "first named insured" which represents an important concept for accounts with multiple named insureds. The insurance company recognizes the first named insured as being:
The Common Policy Conditions together with the Common Policy Declarations makes up the policy jacket for the Commercial Package Policy. Likewise, the intent of the form is to provide conditions that are common to all of the coverage parts, rather than repeating them on each coverage part. These conditions are a part of the Common General Liability policy and it is important for the premium auditor to understand them.
The items covered by this form are:
1. Cancellation - This section details the policyholder's and insurance company's rights and duties to cancel the policy. The "first named insured" may cancel the policy by merely sending a written notice to the insurer. The premium would be refunded on a short-rate penalty basis by the insurer. The insurer, on the other hand, has numerous additional requirements that must be met to cancel the policy. Most deal with properly notifying the insured. Premium returns would be on a straight pro-rata basis.
2. Changes - The only method for changing any of the policy coverages or provisions is with a written endorsement from the company.
3. Examination of Your Books and Records - This condition provides the insurer with the right to examine the insured's books of account as they may relate to the policy. The CGL Coverage Part V reinforces this right as well. With the right of the insurer to audit up to 3 years after the policy period, the insurer may revise an audit (of final earned premium) up to 3 years after the policy term.
4. Inspection and Survey - This section establishes the right to perform an inspection of the insured's facilities without an obligation to do so or for the inspection to warranty the safety of the facility.
5. Premiums - The first named insured is responsible for the payment of the premium.
7. Transfer of Your Rights and Duties Under This Policy - This policy may not be transferred or assigned to another party without the expressed written permission of the insurer.
Commercial General Liability Declarations
1. Policy Number, Named Insured and Policy Period - These items are the same as on the Common Policy Declaration.
2. Limits of Insurance - The limits of insurance limit the amount the insurer is obligated to pay on behalf of the insured. These limits are fixed by the number of insureds or the number of claims. The general aggregate is the total amount payable during the policy period, except for products/completed operations coverage and supplementary coverage. Internal sublimits apply separately to: products/completed operations, personal advertising injury, fire damage and medical expense.
3. Retroactive Date - This applies only to a claims-made policy. In a Commercial General Liability policy, the insured must choose between an occurrence policy and a claims-made policy. The occurrence version of the policy provides coverage for bodily injury and property damage that arises or occurs during the policy period. The occurrence trigger is the method that traditionally has been offered.
Non-owned auto liability provides coverage for the exposure of employees using their own automobiles in the course of their employment. The basis of premium is the total number of employees of the named insured (total employees, not just those driving autos).
Hired autos are automobiles not owned by the named insured but which are loaned to or borrowed by the insured. This would not include common carriers or public autos under contract. The basis of premium is the cost of hire by state, excluding: charges for a driver when the vehicle is hired without a driver, and vehicles leased for longer than 12 months.